When is a market not a real market? When it trades in fake goods — products or services that could not exist if government didn’t bring them into being. A case in point is transferable targeted tax credits, which state and local governments routinely offer to attract businesses.
In recent years, states have joined in a bidding war on tax credits to attract feature film production. This desire for Hollywood glamour has piled on bad economics to create a crony capitalist bonanza in which taxpayers are left holding the bag. The Boston Globe reports:
At least 96 percent of the $265 million in tax credits used to attract movie and television productions to Massachusetts were sold by the film companies between 2006 and 2010, according to the state Department of Revenue.
The incentives are so generous – rebates of up to 25 percent of production costs in the state – that most film companies do not end up owing nearly enough in taxes to use the credits. So they sell them at a discount, fueling a booming industry for brokers, accountants, and savvy taxpayers.
Here’s how it works:
A production company that is awarded $10 million in tax credits might sell them to a broker for $8.7 million. The broker then sells the credits to a financial company that owes state incomes taxes for a bit more – say for $9 million, earning the broker a $300,000 profit. The financial firm can then claim the full $10 million in credits on its tax return, saving $1 million.
These credits would not exist if not for government favoritism toward certain industries, and film production is far being from the only industry that benefits from this targeted largess. Yet it never seems to occur to the geniuses who devise these schemes that a better way to attract business would be to lower taxes and lighten regulation across the board.
Even more distressingly, some critics of these programs seem to buy into the fundamentally flawed idea behind these targeted tax breaks: that governments have the capability to promote economic growth by identifying promising industries, thus picking winners and losers. The Globe‘s Todd Wallack notes:
Critics say the state could save millions of dollars a year by converting the tax credits to a grant program that provides direct subsidies equivalent to the 87 percent value that film companies typically receive.
How about cutting taxes for everybody by a similar amount instead?
If there is a silver lining to this arrangement, it is in its providing a real-world example of what a carbon emissions trading scheme would look like.